Dropshipping Business Model

What is Dropshipping?

Dropshipping enables online stores the ability to offer products without having them in inventory. The way it works is, an online store makes a deal with a product supplier where the store sells the products and the supplier sends it out.

The online store merchant never has to touch the products themselves.

The process of keeping track of sales and coordinating them between the supplier and the buyer can be complicated and time-consuming, but it doesn’t have to be.

How does dropshipping work?

You open up an e-Commerce store and fill it with the products you wish to sell from vendors and suppliers who will allow you to sell their products, while they fulfill them on your behalf.

They store all inventory, then package, ship and send you the tracking information when you place your order with them.

You only pay your supplier once your customer places their order and pays you.

You can learn more about setting up your e-Commerce Store here.

Now that you understand more about how does dropshipping work, let's dive more into the benefits.

Advantages of Dropshipping

1.The start-up costs are smaller.

In order to set up an online business, a good chunk of capital is usually required to buy your inventory of products.

But this can be guess work, as there’s no saying how much stock you’ll sell for that month or year.

Don’t have enough money to start your online store? Dropshipping avoids this problem, eliminating the risk of spending your money on unsold stock.

2. You can offer items almost instantly.

Usually, when a retailer wants to start selling a product, they’ll have to wait until all of their stock has been shipped in order to begin advertising them on their website.

After all, what’s the point in offering an item for sale when you can’t actually sell it?

Using dropshipping means that when you decide you want a product on your site, you can start advertising almost immediately.

3. You can offer a wider range of products.

Having the ability to offer a wider range of products is always something a company can aspire to, and with dropshipping it’s possible.

You don’t have to worry about different colours or sizes and where they’re all going to be stored, you simply list them on your site and your supplier can deal with the rest.

4. Testing new products without a risk

When adding new products to your range, the risk of not selling is always in the background.

Having to guess what your customers want to buy is tricky for any business, so being able to test the water without making any true investment is always an advantage.

If you want to get started with your online store and test new products, you can look up dropshipping marketplaces like AliExpress or check out our blog about dropshipping, we have a list of companies that can help you get started.

5. Time-saving is key

Organising your stock and preparing it for delivery can often be a time-consuming nightmare.

Using a third party to ship items saves handling, labelling, packing, shipping and so on.

This leaves you with the time to focus on growing your business in different areas.

Disadvantages of Dropshipping

1. Processing your orders can become difficult

Many companies that use dropshipping as a sales strategy work with multiple wholesalers, each of whom will come with different requirements for order processing, billing and shipping.

This can make things very complicated.

The time between selling a product and then getting it shipped can also take longer, as this part is out of your hands and you depend on the supplier to process the order quickly.

2. Not having all of the product information is problematic

As you never actually handle the products that you are selling, you have no real idea of what they are like.

Given the manufacturer doesn’t give enough of a product description, you can’t answer general customer enquiries about the products’ dimensions, weight, ease of use and so on.

These questions then have to be constantly forwarded to the supplier, which is time-consuming and causes delays when communicating with customers.

Lack of information and real experience of the product may mean you can provide less useful and unique content on the website which will also harm your SEO.

If you don’t choose the supplier correctly, you might discover that the product you purchased is out of stock.

This can typically happen if you use Drop Shipping on eBay and it’s immensely frustrating for customers who are under the impression that they had purchased a product to find out that they actually didn’t.

In order to eliminate this problem, an automated system which updates stock availability regularly throughout the day is preferable.

You could also request an email or phone call from the supplier if the stock has run out.

3. Customer service issues

Drop shipping removes the responsibility of shipping but it also removes a large part of the customer experience from your control.

There’s no way to ensure that a product has arrived on time or as described.

When a customer calls to either complain or enquire, the process of resolution is slowed as you often don’t have the necessary information at hand and the query or complaint will have to go through a third party supplier before it can be solved.

Learn more about great customer service ideas here.

4. A vast amount of competition is everywhere

Finding great dropshipping products will often mean you will face competition from fellow retailers in your sector.

The margins of dropshipping products can be quite low as many manufacturers charge for the fulfilment service so you have a little amount of room to manoeuvre your prices in order to beat your competitors.

As you can see from the benefits and potential problems, choosing dropshipping is an option that shouldn’t be chosen without major consideration.

The problems that arise can often be solved just by careful planning and implementation of contact between the seller and the supplier.

With enough thought, the disadvantages can be avoided.

You can learn more about the PROS and CONS of dropshipping here.

Must-Know Dropshipping Tips for New Entrepreneurs

DROPSHIPPING TIP 1: ALWAYS GO NICHE

Think back to the beginning of Amazon. Amazon started in the very narrow niche of online books – adding to their store as their brand grew and with it their niche – which, as we know, now includes everything and anything.

The point is, when they started, they were selling in a narrow niche.

Unless you are just opening up a broad store to test the waters before you choose your niche, narrowing your focus is the key to success. Having a dropshipping store that is too general will not enable you to hone in on your potential shopper audience easily or make brand building – the key to site trust – possible.

To choose the right niche, you’ll want to look where you passions are, research industry trends, and think about your target shopper. Then, you will want to analyze and evaluate the demand, the competition and the market to see how you could fit in.

Dropshipping Tip 2: Choose the Right Supplier

Ultimately the products you choose directly reflect your brand and therefore it is important to be picky about your products. There are 2 steps to choosing the right supplier:

Step 1: Supplier Audit

Here is where you will check all the details of suppliers, the range of products they sell and their reviews, to ensure their credibility and quality.

Step 2: Narrow Down Your List

You can do this by comparing the product prices, guarantees, and whether they include e-Packet service.

Click here for more information about choosing the right supplier.

Dropshipping Tip 3: Put Effort into Your Website

Yes, it is true, dropshipping allows you to cut corners and cost, but that doesn’t mean you should be doing the same with your website.

Customer experience goes a long way to building trust, so make sure you put thought and effort into your home page, that your store is correctly optimized for the user and SEO, your product descriptions have substance and are error free, your product photos are good quality and your shipping and returns policies are clear.

Take a look at competitive, successful online stores in your niche for inspiration, consult eCommerce-friendly Facebook groups for great tips, and of course, make sure your store is optimized for conversions.

Dropshipping Tip 4: Look at the Numbers

When choosing a specific product, you will want to ensure that it’s at the right price point for the service you will be getting, that is has marketing potential, its profit capabilities, and that it is something not easily found in the areas you are selling in. To do that you’ll want to look at these two calculations:

Sales Revenue – Cost of Goods = Gross Profit
(Gross Profit – Expenses) / Revenue = Profit Margin

The thing to remember though, is not to under-price your products. Dropshipping allows you to get products at almost wholesale cost, meaning you should be pricing at or just below market value (depending on competition) in order to make a profit.

Dropshipping Tip 5: Rev Up Your Customer Service

As we learned in last week’s e-Commerce marketing trends post, conversational commerce is so hot right now. It should be no surprise that customer service is a dropshipper’s best friend. It allows you to successfully beat e-Commerce competition in your niche, including big guys like Amazon.

Making customers feel valued, respected and important not only pushes sales but grows your lifetime customer base.

When it comes to customer service for dropshipping stores, it is important that they understand that you are responsible, that your customers’ wants and needs are important and that their happiness is your number-one priority.

Click here to know more about tips on how to compete with tough competitors.

Dropshipping Tip 6: How to Handle Returns

Return handling is a customer service complication that can arise with dropshipping that can have a big impact on overall customer satisfaction.

As a dropshipper, you have a few more logistics to iron out here, such as whether customers return items to you or your vendor. The advantages of receiving returns yourself is that this will allow you to offer better customer service.

The disadvantages include the logistics of receiving, storing and then reselling returned items.

Suppliers that allow you have returns go directly to them means you don’t need to storage space and it takes the ‘work’ out of it. However, having returns sent to a third party could have the following risks:

They could reject returns if the items and packaging are not in perfect condition.
They may charge restocking fees.
They may have complicated return instructions that are not easy for your customers to understand.

You can learn more about correct return handling in our Right Way to Handle Refunds post.

More about handling refunds here.

Dropshipping Tip 7: Automate

Automate your dropshipping business as much as possible. Sure, some dropshipping apps will handle a lot of the automation for you, but there are still cracks you will need to cover such as your PPC campaigns, Google, social media, marketing, blog content, etc.

By automating what you can when you can, you will be able to live your entrepreneur dreams and start your business before you “screw your 9-5 job.”